Twist on covered calls.

I stumbled upon an interesting wrinkle in options trading that may prove to be very beneficial in the future.

I can currently buy calls and puts as they do not involve anything more risky than just losing the entire cost of the options.

Covered calls require owning the underlying stock and writing or selling calls (or puts) against this position in order to make money based on the premium which makes up the extrinsic value of the option.

Assume I have a stock at $30. I then sell the call option for the strike price of $35. The option sells for, say, $2. I put $200 per contract in my pocket. Total capital is $3500. possible loss is $3300...in theory.

1) The stock price goes up past the strike price and the option is exercised buying my stock for $35. Profit equals the gain on the stock for $5 ps plus the premium of $2 ps. Total profit is limited to, but realized at, $700

2) The stock price remains, more or less flat, or at least does not reach $35. Profit at option expiry is $200. I can sell another call option.

3) The stock price drops to $25. The call expires, $200 profit which offsets the $500 loss if I sold my stock so the final loss could be $300. Of course if the stock continues to drop the loss is larger but I'll assume a stop is in place...which I am not sure how that would work with an active covered call.

Here is the twist. Options are guaranteed to be exercisable, they are always good. So If I buy a call option with a long expiry on the above stock for a $25 strike, giving me the option to buy the stock in future for $25 it is as good as buying the stock outright at $25... but the option may only cost $7 ps... AND I sell a call option on the same stock with a strike of $35 for a $2 premium. Total capital of $500... this is also my maximum risk.

My numbers may be off but the idea is sound. I will run a real example another time to see if the costs are close, I expect that the call sold is not worth as much as $2...but it looks good.

1) The stock price raises past the covered call strike of $35, I exercise my $25 strike option to sell to the buyer at $35. Profit is $10ps plus the $2 ps premium or $1200

2) The price remains flatish. I keep the $200 and can sell another call.

3) The stock price drops to $25. I can sell my call for whatever extrinsic value is left and keep my $200 premium or consider that I have taken most of the loss already and sell another call option. Possible loss could be $300. I don't need to worry about stops as my total risk is small.

Limited risk and limited profit potential option trade.

There are quite a few ways to configure an options trade with two simultaneous trades, and even some with three that I have not looked at too closely yet.

All in all I think there is a trade that will suit almost any stock or market situation to have a decent opportunity to produce profits, even when the price of a stock does not move at all.

Jeff.